Shareholder Disputes Series (Part 5 of 10): Exclusion from management / No Involvement in important decision making

Majority, you not allowing me to be a director or be employed by the company as expected. You’re not running anything by me at all!

Introduction

Proprietary companies are often controlled by a single shareholder or a group. The majority’s nominated directors will control the board and therefore the activities of the company. If the majority (whether as shareholders or with their nominated directors) run the company in their own interests, the detriment to the minority can be serious. The minority shareholders have limited options because they cannot vote the directors out, in a general meeting, without the majority’s support. Getting out is difficult because they cannot force the majority to buy them out. As it’s not a listed company, they are also likely to find it hard to find a buyer of their minority stake. They are locked in with no control of their investment. It’s a difficult position to be in.[1]

The following are the most common complaints made by minority shareholders[2]:

The majority are paying themselves excessive remuneration;

Little or no participation in profits;

The majority are diverting corporate opportunity / are operating a competing business;

Exclusion from management;

No involvement in important decisions;

Limited access to information about the company’s affairs;

Inability to prevent dilution of their equity stake;

No freedom to transfer shares;

No market for their shares;

Bad management by the majority.

The following is a consideration of the forth of these complaints, with recommendations on how a shareholders agreement will assist to prevent it.

Shareholders Agreement – What is it?

Shareholders agreements are a fundamental tool to help a company’s shareholders establish expectations and manage their risk. They are particularly useful to establish rights for minority shareholders and arguably, its primary purpose is “to eliminate the tyranny of the majority”[3].

Starting Point – The Company’s Constitution

To properly appreciate how to address a risk in shareholders agreement, you first need to understand what the legal position would be without a shareholders agreement. To do so, the first point of call is the company’s constitution. This is because the company’s constitution contains provisions relating to the day-to-day internal management and proceedings of the company – the rules.

Legally, a company’s constitution has effect as a contract:

between the company and each shareholder; and

between the company and each director and company secretary; and

between a shareholder and each other shareholder;

under which each person agrees to observe and perform the constitution and rules so far as they apply to that person[4].

Every company’s constitution will be different, depending on who originally helped the company founders establish the company. Typically, however, the constitution provides that the business of the company is to be managed by or under the direction of the directors. The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in a general meeting.[5].

Without any control of the board of directors, let alone having a director on the board (or having a nominee appointed) a minority shareholder has no say in the management of the company.

Protection

The shareholders agreement can incorporate the following provisions to protect the minority:

Nominee Director: a provision giving minority the right to appoint and replace a director should be considered.

Employment: a right for the minority to be employed by the company or provide services to the company incapable of variation or termination but for breach.

Veto: a power to veto critical management matters is also an option. This is usually achieved by requiring unanimity or concurrence of a higher percentage of voting units for a resolution.

Shareholder Disputes Rights and Remedies

This post is not a consideration of the legal duties and remedies that may prohibit the conduct or the remedies available when such conduct occurs. If you have, or anticipate, a dispute between shareholder in your company as a result of any of these complaints, please call Joe Kafrouni to discuss how we can help.

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

A deed of guarantee is a legal document in which one person or company guarantees that it will fulfill the obligations of another person or company if it is unable to do so. It is typically used in the context of guaranteeing the repayment of a debt, where the loan... read more

A distribution agreement is a contract made between the manufacturer of a product and the person or company who distributes and sells the product. The distributor will generally sell the product to a third party, a dealer, who will then sell the product to the final... read more

A dealer agreement is a contract between a distributor of goods and the company who sells them to the public. Typically, the manufacturer will sell a product to the distributor, the distributor will then sell the product to the dealer, and the dealer will then sell... read more

What is it? A company charge arises when one party (the ‘chargee’) is granted a legal interest in the assets of the other party (the ‘chargor’) as security for the performance of a specific obligation, generally the repayment of a loan. There are two types of company... read more

A consultancy agreement is the contract that exists between a consultant and his or her client which covers the terms of the engagement. Application for small business people A small business may wish to hire a consultant for a specific purpose, for example to work on... read more

An asset purchase agreement is a contract which governs the sale of business assets from one party to another. Application for small business people If a small business wants to expand, then the owners will often consider acquiring a smaller competing business or... read more

An agency agreement is a contract which enables one party (the “agent”) to enter into subsequent agreements on behalf of another party (the “principal”). In other words, the agent can sign contracts and other legal documents which are binding on the principal. ... read more

A confidentiality agreement is an agreement between two or more parties which is entered into when the parties wish to share certain information with each other for a specific purpose, but they want to prevent this information from being disclosed to others. It may... read more

A loan agreement is a contract between the lender and the borrower of money or property. It sets out the terms and conditions of the loan, and the rights and responsibilities of each party. Application for small business people Many small businesses need to take out... read more

Website terms and conditions are the rules that govern the legal relationship between the owner of a website and the user of the website. They set out the rights and responsibilities of each party in relation to the published content or information submitted online.... read more